Edited version of private advice

Authorisation Number: 1051935790618

Date of advice: 21 December 2021

Ruling

Subject: GST and the supply of water

Question

Are water and sewerage connection services, including ancillary services, performed by Entity A (an entity approved by you) and provided to consumers directly under an arrangement between Entity A and the consumer considered a GST-free supply under section 38-285 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the supply of water and sewerage connection services, including ancillary services performed by Entity A, an approved entity directly to consumers is not a GST - free supply.

This ruling applies for the following period:

The scheme commences on:

Relevant facts and circumstances

xx ("You") are registered for GST and is responsible for the provision of water and sewerage services across Tasmania, as covered by the Water and Sewerage Corporation Act 2012 and is the sole water authority serving the xx community.

Entity A has been registered for GST since 23 August 2011.

In supplying these services, you currently has a panel of 6 entities which includes Entity A who is an "Approved Entity" (AE) and who undertakes works of connecting water and/or sewerage services for your customers. Under the existing arrangements, you engage the AE to perform water and/or sewerage connections, and the AE invoices you directly for the services it performs as a taxable supply.

You are now proposing to supply water and sewerage services to customers in a manner described below:

a.    A customer contacts you for the delivery of water and/or sewerage services;

b.    You provide the customer contact details of the AE that can undertake 'certifiable work' to enable the supply of water and/or sewerage services from your main distribution lines to the customer's premises.

c.     The customer will engage the AE to undertake the certifiable work.

d.    The AE will quote the customer for the work to be undertaken;

e.    If the customer agrees with the quote, the AE will perform the certifiable work. The AE will advise you of the completion timeframe and any other relevant information of the certifiable work,

f.      The AE will invoice the customer for the certifiable work that was undertaken.

g.    Examples of works done are:

·         Installation of new service connections to currently un-serviced lots;

·         Adjustment (upsize, downsize, relocation) of existing service connections to lots currently provided with a service connection;

·         Installation and adjustment of connections in residential and business sites

·         Installation and adjustment of connections in urban and rural sites;

·         Installation of water meters on lots currently provided with a compliant water connection, and

·         Renewal of connections where the existing service is not deemed to be compliant with existing standards.

As part of your agreement with the AE, both you and the AE:

a.    acknowledge that the ownership of the completed certifiable work will vest with you; and

b.    acknowledge that you are not engaging them on your behalf to perform any works to customers. All works performed by the AE in accordance to the deed will be through direct engagement by 3^rd party property owners, developers and agents.

You further advised that you and the AE have no relationship of partnership, principal and supplier, principal and contractor, principal and agent or employer and employee.

Under the proposed arrangement, the AE invoice the customer directly to reduce administration burden on you and the end recipients.

On xx, we had a discussion with your tax representative and advised them that water connection and/or sewerage connection including ancillary services performed by the AE and provided to customers would not be considered a GST-free supply. Your tax representative requested that we provide this advice in written format.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 38-285

Reasons for decision

Section 9-5 of the GST Act states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

(*) denotes a term defined in section 195-1 of the GST Act.

A supply of water is GST-free under section 38-285 of the GST Act.

Goods and Services Tax Ruling GSTR 2000/25 GST-free supplies of water, sewerage and sewerage-like services, storm water draining services and emptying of a septic tank (GSTR 2000/25) outlines the Commissioner's view on this matter.

Paragraphs 20 and 21 of GSTR 2000/25 explains what the supply of water is for the purposes of section 38-285 of the GST Act:

20. 'A supply of water,' in section 38-285, refers to the delivery or the making available of water, as goods, to a recipient's premises...

21. Appropriate analogies can be drawn between the system for the distribution of electricity discussed in the SECV case and the 'supply of water' referred to in section 38-285. A 'supply of water' is the provision of tangible personal property - that is, goods. In other words, the supply of water means the change in ownership or control and transfer of physical possession of water from a supplier to a recipient. In this Ruling, we refer to this as a delivery of water.

GSTR 2000/25 further provides that the supply of water includes the delivery of water via reticulated pipes from the water course to the end recipient. Paragraph 24 of GSTR 2000/25 specifically provides that "activities performed by the supplier up to and including the point of supply to the recipient is GST-free" (our emphasis).

The principles outlined in the ruling have been applied in your circumstances.

Under the Proposed Agreement Entity A, an approved entity, appointed by you will be engaged directly by the recipient and will provide services throughout the water supply and sewerage system, including the installation of meters, pipes, mains and pumps, and connection up to the point of the recipient's premises. In the proposed customer deed, you have referred to these works as "Certifiable works".

Under the agreement, both you and the AE agree that the ownership of the completed Certifiable works will vest with you and you are not engaging them on your behalf to perform any works to customers.

You further stated that all works performed by the AE in accordance to the deed will be through direct engagement by 3^rd party property owners, developers and agents.

However, in the deed agreement provided by you under "Number 8: Communication and Reporting" the AE still bears the responsibility to provide you with an update as to how they are tracking with the Certifiable works. This is illustrated particularly by the following statements:

(a) If requested by you, the Provider must update your Representative on the status of any Certifiable Works that it is engaged to carry out and report in a form and at a frequency agreed by the parties.

(b) The Provider must promptly notify you of any:

(i) substantial change to the Provider's technical capacity to undertake the Certifiable Works; or (ii) any Change in Control

(iii) any adverse finding of a court or regulatory body regarding the Provider's business operations (iv) change to the Provider's business registration details.

(c) If requested by you, the Provider must provide to you a summary of any audit reports and the details of their findings pertaining to:

(i) the Supplier's: (A) quality management system; (B) financial statements; (C) environmental management system, processes or procedures; and (D) WHS management system, processes or procedures;

(ii) the currency of training of Key Personnel.

Paragraph 24 of GSTR 2000/25 also states:

24. Activities performed by the supplier of water up to and including the point of supply to the recipient of water are GST-free if they are integral to the physical delivery of water to the recipient. The system for the physical delivery of water to an end recipient may be the responsibility of more than one supplier of water. For example, a supplier of bulk water may supply bulk water to another supplier who makes retail supplies of water to end recipients. The following will be GST-free:

·         initial connection, re-connection, disconnection, water meter installation, and tapping and tee insertion;

·         irrigation channel water scheduling and channel attendance (including channelling from natural water courses);

·         irrigation channel maintenance up to and including the point of supply (where it is charged to the water supply recipient); and

·         water meter reading and testing.

Based on the facts of this case, whether under the current or new proposed arrangement, the AE is not making a supply of water, they are simply supplying water and sewage services. The services of the type the AE is performing on the pipes will only be GST-free where they are integral, incidental or ancillary to the supply of water. For a supply to be integral, incidental or ancillary there has to be the dominant supply of water from the same supplier which is absent in your case.

Paragraphs 58 - 60 in the GSTR 2000/25 also provides 2 examples where a distinction can be made for subcontracted supplies.

58. A supplier (A) who makes a supply covered by Subdivision 38-I may engage a subcontractor (C) to fulfill some or all of A's contractual obligations to the recipient of the supply (B).

59. Where only A is involved in making the supply, there is only one supply: the GST-free supply from A to B.

60. However, where A subcontracts with C to fulfill some or all of A's contractual obligations to make the supply to B, there are two separate supplies. First, a supply from C to A, for which C receives consideration from A. This supply from C to A is taxable. The second supply is the GST-free supply from

A to B.

Current arrangement

At paragraph 60 of GSTR 2000/25 Case 2 is akin to the current arragemnent between you and the AE where you 'subcontract' to the AE for providing the connections services. The AE is a supplier of water and sewerage services to you. The AE is not supplying water to you, therefore it cannot be said that the these services by AE to you is an integral part to the supply of water. That is why the supply of water and sewerage services by the AE to you is a taxable supply.

Proposed arrangement

Drawing from the above, the proposed arrangement described by you is where the AE is a supplier of water and sewerage services. Even though you have stated there is no principle and/or subcontractor relationship, you are actually 'subcontracting' to the AE the water and sewerage services (integral to your supply of water to Customer). In addition to this, you have stated that these services should be GST free as these activities can only undertaken by the AE, however they are not the supplier of water. You are still the supplier of water and they are just assisting you and they are at no times acting on your behalf.

The AE will be a supplier of water and sewerage services to the customers. However, as they are not the supplier of water to the customers, it cannot be said that the water and sewerage services is an integral part for the supply of water. As such, the supply of water and sewerage services by the AE to customers will be a taxable supply.

While we note that your contention is that the home-owner as a recipient of the supply of water should still get the same GST outcome, however section 38-285 of the GST Act is not one where the status of the supply depends on who is, or the circumstances of, the recipient.

There is consistency in our view in regards to your current and proposed arrangement. That is, the AE is supplying services which are taxable under the existing arrangement and they continue to provide services that are taxable under the proposed arrangement.

In conclusion, the proposed agreement as evidenced by the draft customer connection deed and other relevant documents entered by you and the AE, whereby the AE bills the end consumer directly, does not satisfy the requirements of a GST-free "supply of water" under section 38-325 of the GST Act.